COML204: Derivative Actions

Derivative Action (Definition)

An action where a court grants a shareholder or director permission to bring legal proceedings in the name of and on behalf of the company (s 165)[cite: 10].

Who Can Apply under s 165?

A shareholder OR a director of the company[cite: 10].

Rule in Foss v Harbottle

The common law principle that the company is the "proper plaintiff" for wrongs committed against it, and only the board can initiate proceedings[cite: 10].

Section 165 "Gatekeeping" Role

The court determines whether leave should be granted to sue on the company's behalf; it is not a trial to determine the final merits of the substantive case[cite: 10].

Personal Action vs Derivative Action

Personal (s 169) is for a breach of a duty owed directly to the shareholder; Derivative (s 165) is for a wrong done to the company where the shareholder only suffers indirect harm[cite: 10].

Duties Owed Directly to Shareholders (s 169)

Duties to maintain the share register (s 90), disclose interests (s 140), and disclose share dealings (s 148); does NOT cover general loss in share value[cite: 10].

Orders Directing Action: ss 170 & 172

Section 170 allows the court to order directors to act; Section 172 allows the court to order the company (via the board) to act[cite: 10].

Personal Action Against the Company (s 171)

A shareholder can bring a personal action directly against the company itself for a breach of a duty owed to them as a shareholder[cite: 10].

Representative Actions (s 173)

Allows the court to permit one shareholder to represent a group of shareholders who have the same or similar grievance[cite: 10].

Where Remedies Go in a Derivative Action

Any damages or profits recovered go directly to the company, not into the personal pocket of the shareholder[cite: 10].

Self-Interest in Derivative Actions

A shareholder's personal self-interest in the outcome does NOT disqualify or prohibit them from bringing a s 165 action[cite: 10].

Statutory Considerations for s 165 (Acronym: CLIC)

The court must take into account: Cost vs likely relief, Likelihood of success, Interests of the company, and Company's actions taken to gain relief[cite: 10].

Mandatory Grounds for Granting Leave (s 165)

The court must be satisfied that: (1) the company will not take proper action itself, AND (2) it is in the company's interests not to leave it to the directors or general meeting[cite: 10].

Costs in Derivative Actions

The court has statutory discretion to order that the company pays the legal costs incurred by the shareholder in bringing the claim[cite: 10].

Prudent Business Person Test (Vrij v Boyle [1995])

Standard for s 165 likelihood of success: would a prudent business person, balancing costs against likely recovery, choose to proceed with the action?[cite: 10]

Thorrington v McCann (1998)

A co-director secretly renewed a tavern lease under his own new company; leave was granted under s 165 because the claim was substantial and met the prudent businessperson test[cite: 10].

Presley v CallPlus Ltd [2008]

A director diverted company IP and staff to a new venture; leave under s 165 was granted based on the Vrij v Boyle test despite board opposition[cite: 10].

McKay v PHC Holdings Ltd (1998)

Derivative action refused because the company was an empty shell with no real business to benefit; it was purely an internal dispute best resolved in winding up[cite: 10].

Courts' Policy Concerns under s 165

Avoiding trivial suits, preventing double dipping, avoiding cost-shifting to small shareholders, and ensuring directorship is not deterred by endless litigation[cite: 10].